FirstEnergy Q1 2022 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
April 22, 2022
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Operator

Greetings, and welcome to the FirstEnergy Corp. First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, it is now my pleasure to introduce your host, Irene Prezelj, Vice President, Investor Relations for FirstEnergy Corp. Thank you, Ms. Prezelj. You may now begin.

Irene Prezelj
Vice President, Investor Relations at FirstEnergy

Thank you. Welcome to our first quarter 2022 earnings call.

Today, we will make various forward-looking statements regarding revenues, earnings, performance, strategies, prospects and other matters. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by these statements can be found on the Investors section of our website under the Earnings Information link and in our SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures, the presentation that supports today's discussion and other detailed information about the quarter and year can be found in the strategic and financial highlights document on the Investors section of our website.

We'll begin today's call with presentations from Steve Strah, our President and Chief Executive Officer; and Jon Taylor, our Senior Vice President and Chief Financial Officer. Several other executives will be available for the Q&A session.

Now, I'll turn the call over to Steve.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thanks, Irene, and good morning, everyone. Thank you for joining us today.

We're off to a solid start in 2022. Yesterday, we reported GAAP earnings of $0.51 per share and operating earnings of $0.60 per share, in line with the midpoint of our guidance. With our financial performance, operational momentum, portfolio of assets and robust long-term business model, we are in a strong position and I'm optimistic and excited about the future.

Today, we are reaffirming our operating earnings guidance of $2.30 to $2.50 per share for 2022 and growth of 6% to 8% thereafter, based on our five years $17 billion investment plan. And while the dividend is subject to Board approval, I can affirm that we will still expect to maintain our annual dividend rate of $1.56 per share this year, with the objective to grow the dividend within our payout ratio as earnings increase from our 2022 base.

This year, we're focused on continuing our transformation into a company with a strong foundation, and unrelenting focus on our customers and a leader in the energy transition. Over the last couple of years, we've asked a lot of our employees as we implemented a series of changes. From FE Forward initiatives to our enhanced values, numerous updates to policies and procedures and multiple training sessions across the company, our employees have accomplished a lot. And they have done this while executing at a high level across the company. I am very grateful for all of them, and incredibly appreciative of their work and strong performance over the many years, but especially over the last 18 months. I'm very proud of what they have done.

Building off this momentum, we believe that our employees and culture will be the single most important value drivers of our long-term strategy. Earlier this year, we formed a cross-functional culture transformation working group to consolidate, coordinate and streamline our numerous initiatives designed to drive culture change, with the goal of making these changes meaningful and impactful to employees. By better aligning our culture initiatives and narrowing the focus with a simpler, integrated culture change roadmap for 2022, we can help employees make meaningful steps in a few areas at a time.

The outcome of this work resulted in identifying three key focus areas for our culture transformation for 2022. Embedding our refreshed values, integrity, safety, DE&I, performance excellence and stewardship into every aspect of our culture; fostering an open, trusting environment where leaders create opportunities for two-way dialogue and employees feel valued and empowered; and improving advancement and development opportunities for our employees.

We are supporting these efforts by consistently demonstrating our values and action in communicating with employees, creating a culture champion network to support our transformation efforts, facilitating listening sessions hosted by me and other members of our senior leadership team, along with small group employee discussions and quarterly speak-up sessions that encourage open and transparent two-way dialogue, and enhancing our focus and accountability around more robust, meaningful discussions between employees and their supervisors that support career management and development. We're striving to empower employees to make their jobs more meaningful, and encourage the candor and collaboration that can make our company more innovative, customer focused, and a great place to work.

Changing a culture takes time, trust and persistent modeling, as well as alignment with our employees' personal values and needs. I'm deeply committed to this, as is our leadership team. And we view it as critically important work. By listening, being more open and transparent, we can do better and produce better results for all of our stakeholders, including our employees, customers and investors.

Taking a more open and engaged approach is also a cornerstone of our efforts to prioritize our customers and enhance the customer experience. Last month before Winter Utility Disconnection Moratoriums lifted in our areas, we launched an enhanced campaign to engage residential customers who may be facing financial hardships. We recognized that many customers in this position don't reach out for help, and they may be unaware of the various utility bill assistance programs available to them.

To reach these customers, we produced a video message featuring several members of our customer service team. They spoke passionately about their desire to assist customers. And we raised awareness of various programs and payment options that might help during these difficult times. Our goal was to reach out and invite customers to come to us for help.

At the end of March, we had more than 0.25 million customers enrolled in utility assistance programs, with $71 million in funding applied to those accounts. Compared to the first quarter of 2021, that's an increase of more than 17% in contributions directly benefiting customers enrolled in these assistance programs this year. This effort also contributed to a continued decline of past-due balances, which are now on par with pre-pandemic levels in Ohio and West Virginia, reducing the risk of bad debt. This campaign is the first step to enhance the customer experience, show customers that we care and we will help them wherever they are on their journey.

As we discussed on our fourth quarter call, FE Forward is our engine for optimizing our organization and customer-focused initiatives, including numerous projects designed to enhance communications, self-service options and provide better experiences for customers who are in need of assistance. For example, we've recently enhanced our website to make it easier for customers to understand and pay their bills. They can also use new features to easily make a payment for a family member or friend, enroll in payment plans that level out their billing, identify assistance programs and avoid service disconnection.

From an organization standpoint, now that we've aligned our utility operations into a five state model to enhance collaboration, streamline processes and maximize efficiency, we are beginning a longer-term review to consider the possible benefits of combining our Ohio entities as well as those in Pennsylvania from a legal, financial, operational and branding perspective.

And finally, FE Forward will improve productivity and our cost structure through investments in digital technologies, upgrading and integrating key systems and using data to help us make better, more efficient decisions for our customers. Through these investments, we anticipate significant productivity improvements, substantially reducing the need for high-cost external contractors that augment our workforce today. Our commitment to prioritizing customers also means providing excellent service and preparing for the grid of the future.

In Ohio, we are nearing the end of the first phase of our grid mod program, which began in 2019 and includes investments in smart meters, distribution automation and voltage regulating equipment. The program also supports our advanced distribution management system that is being installed to help automate the outage restoration process and optimize grid performance. We're excited about the benefits these investments can provide to our customers, including enhanced reliability, improved power quality and greater visibility into their electricity usage. We plan to file for a second phase of grid mod investments in Ohio in the third quarter to continue this successful program.

In New Jersey, JCP&L received approval from the BPU to begin installing smart meters on customer homes and businesses in 2023. The approved plan includes a capital investment of $421 million for the installation of more than 1.1 million smart meters over a 36-month period. Across our entire footprint, our utilities have installed more than 2.7 million smart meters since 2014, with implementation efforts nearly complete in Pennsylvania and currently underway in Ohio.

In New Jersey, we are working toward a settlement of our proposed EV Driven program. The four-year program is designed to accelerate the adoption of light-duty electric vehicles with incentives and rate structures that would support the development of an EV charging infrastructure throughout our JCP&L service territory. We are also making solid progress to complete our sale of a 19.9% stake in FET to Brookfield.

Last week, CFIUS notified FET and Brookfield that it's determined there were no unresolved national security issues and its review of the transaction was concluded. And yesterday, FERC issued its orders on the pending applications for Blackstone's designee to serve as a voting member on the FE Corp. Board and for authority to close the transaction with Brookfield.

We remain on track to close the sale of the FET minority interest in the second quarter of this year and deploy the proceeds thereafter. We also continue to make progress in resolving outstanding litigation in order to provide certainty to stakeholders and focus our attention on the future. Last week, we reached a settlement in the ratepayer civil RICO lawsuit in the amount of $37.5 million. We previously recognized the reserve for this settlement in our fourth quarter 2021 earnings.

I'm looking forward to working with our refreshed Board, including new nominees, Sean Klimczak of Blackstone and Jana Croom, who is the Chief Financial Officer for Kimball Electronics. At the same time, I'd like to express my sincere appreciation to our outgoing Board Members; Don Misheff, Mike Anderson, Julia Johnson, Tom Mitchell, Chris Pappas and Luis Reyes. I am very grateful for their expertise and guidance.

Thank you for your time today. We are committed to continue delivering financial and operational excellence as we execute our long-term business strategies and transform our company into a more innovative, resilient and industry-leading organization.

Now, I'll turn the call over to Jon for a financial update.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Thanks, Steve, and good morning, everyone. Thanks for joining us.

As Steve said, we're off to a solid start this year. Our first quarter GAAP earnings of $0.51 per share and operating earnings of $0.60 per share were in line with the midpoint of our guidance. Excluding the impact of our recently issued equity rate credits provided to Ohio customers under our PUCO approved stipulation last year and accounting policy changes, operating earnings increased by $0.03 per share compared to the first quarter of 2021.

Our first quarter results include several special items, the largest being a $0.06 per share charge associated with the redemption and early retirement of an $850 million FE Corp. note in January of this year. Excluding the items I mentioned, the results in our distribution business decreased slightly, but were consistent with our business plan. The year-over-year change was primarily driven by a slight increase in operating and other expenses, primarily related to planned outages in West Virginia, and higher storm costs and employee benefits, partially offset by lower uncollectible expense. These costs were partially offset by higher customer demand, and the continued economic recovery in the commercial and industrial segments.

It's important to note that our operating costs were in line with our forecast as discussed on the fourth quarter call. Our total distribution deliveries increased 3.6% compared to the first quarter of 2021 and were only slightly off our load forecast for the first quarter. Breaking the year-over-year impact down by customer class, we saw a 2.2% increase in residential demand, due primarily to weather and on a weather-adjusted basis, customer usage decreased only slightly versus the first quarter of 2021 as customers continued resuming normal work and social activities.

Deliveries to commercial customers increased 7.6% and 4.7% on a weather-adjusted basis, which is a significant increase in this customer class. While sales to industrial customers increased 2.5% with many sectors, including steel and automotive showing recovery from recessionary conditions. Overall, customer demand continues to slowly return to pre-pandemic levels. Our one-year residential sales trend is about 3% higher than 2019 levels, while commercial and industrial deliveries remain about 4% and 2% below 2019.

In our transmission business, first quarter results increased $0.03 per share, primarily due to rate base growth associated with our ongoing investments in our Energizing the Future program. And in our corporate segment, our results compared to the first quarter of 2021 primarily reflect lower interest expense and higher investment returns. In addition to our earnings guidance, we are on track to meet our cash from operations target of $2.6 billion to $3 billion this year, and improve operating cash flow consistent with earnings over time.

We met with the rating agencies earlier this month and had a good conversation about our progress, including ongoing efforts to improve our balance sheet and strengthen the credit profile of FirstEnergy, as we work to reach 13% FFO-to-debt by 2024, targeting mid-teens thereafter. As Steve mentioned, we're on track to close the FET transaction in the second quarter.

As we said, we plan to use a significant portion of the $2.4 billion in proceeds from the Brookfield transaction, together with a $1 billion Blackstone equity investment to strengthen our balance sheet by reducing debt or debt-like obligations and to fund our capital program. In addition to the $850 million FE Corp. note we retired in January, we plan to retire an additional $500 million at the corporate level after the Brookfield transaction closes and recapitalize certain operating companies to enhance their credit metrics and capital structures. Later this year, we'll make a determination on the deployment of the remaining $800 million, which could be used for a voluntary pension contribution, further reductions in FE Corp. debt or to fund capex.

As we have mentioned previously, 2022 is a light year on the debt financing front, with up to $750 million of planned debt issuances. However, steep increases in interest rates and market volatility have impacted our pension plan. As of the end of the first quarter, the discount rate for our pension obligation increased nearly 75 basis points or 25% to 3.75%, while the assets in the pension plan had close to a 6% loss for the quarter. While the funded status has improved from 82% at the end of 2021 to 84%, the volatility in the interest rate and equity markets has created a potential headwind for higher pension expense in 2023 and beyond. This is something we will continue to watch throughout the remainder of the year. But we are already thinking through different opportunities to offset this potential headwind.

Yesterday, we affirmed our 2022 operating earnings guidance and provided guidance for the second quarter of $0.46 to $0.56 per share. Given the number of moving pieces we have this year, we recognize consensus estimates by quarter are somewhat challenging for analysts at the moment. And we appreciate your work to get through this period with us. We're off to a solid start this year, and we've got an excellent transformation plan to continue becoming an industry leading company, focused on long-term value for investors, customers, our communities and employees. As always, I appreciate your time and your interest in FirstEnergy.

Now, we'll open the line for your questions.

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Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from the line of Jeremy Tonet with J.P. Morgan. Please proceed with your question.

Jeremy Tonet
Analyst at J.P. Morgan

Hi. Good morning.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Good morning, Jeremy. How are you?

Jeremy Tonet
Analyst at J.P. Morgan

Good. Good. Thanks. Just want to start off, I guess, with the review that you spoke about with potentially combining the Pennsylvania and Ohio entities in the respective states. And just wondering if you could walk us through in a bit more detail what would be kind of the gives and takes of why or why not do that as you think about this process going forward? Why is the review happening now as opposed to any point in the past as well? Just kind of curious on your thought process and what the drivers could be there?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Well, thanks for your question. Through our FE Forward program, we have aligned our operations into a five-state operating model and we're finding efficiency gains there already, even though it's early in the process and we're very excited by that. We're reviewing the legal entity and financial consolidation because we believe the time is right to stand a team up and do a very thorough review of the opportunity. We have fielded calls and head questions over the last several years in my experience on would there be an opportunity here. And given our comprehensive review of the organization opportunities, we thought now is the right time to get a project team stood up and underway. And while it's early, the team is really going to be charged with assessing the benefits for the company through any kind of consolidation. But then we also have to keep our customers in mind and what type of benefits they may see from any action that we take here. The potential benefits, Jeremy, to me, are the potential for increased efficiencies in some of our administrative functions. And there is also a possibility that it could provide us better access to capital markets. So that's really our view of it.

Jeremy Tonet
Analyst at J.P. Morgan

Got it. So it doesn't seem like there's anything out there that would prevent you or dissuade you at this point as long as everything unfolds is what you expect in the review process? Is that kind of a fair way to think about it?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Well, I think the team is charged with probably a critical cost benefit analysis. And once we're completed with that, we're going to do what makes sense here for our customers and for our company. And if it makes sense to us, we'll move ahead and we'll keep you updated on our progress.

Jeremy Tonet
Analyst at J.P. Morgan

Got it. Thanks for that. Just pivoting here, I want to cut -- to hit on some of these accounting changes that you're going through your distribution companies. And could you just refresh us, walk us through the process that led you to these changes and how we should be thinking about impacts going forward here? Is everything kind of set at this point as far as what levels of changes there are?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yeah. Hey, Jeremy. This is Jon. First of all, let me apologize in advance for my voice. I've been under the weather this week and my voice is a little off. But to answer your question, there's really two primary accounting changes. One was corporate support costs that we had historically capitalized based on a methodology. As we went through the FERC audit, they had maybe a different point of view. And so we came to the conclusion that some of the corporate costs that we had historically capitalized going forward wouldn't get that level of capitalization going forward.

And then the second accounting change was around veg management, where we had historically capitalized a portion of our veg management program. And through various state audits and the FERC audit, we decided to move forward with having all that flowed through the P&L. So on average, it's about $150 million a year that historically has been capitalized that now flow through the P&L that is baked into our plan for the full year of 2022 and going forward.

Jeremy Tonet
Analyst at J.P. Morgan

Got it. Sounds good. I'll leave it there. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you.

Operator

Our next question is from the line of Julien Dumoulin-Smith with Bank of America. Please proceed with your question.

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

Hey. Good morning, team. Thanks for the time. So maybe just at a high level, how did the April rating agency conversations go? How you think about the prospects for fully being IG [Phonetic]?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Julien, thanks for the question. As Jon had mentioned in his prepared remarks, we had three, what I would characterize as very good meetings in April to discuss our continued transformation and our ongoing efforts to improve our balance sheet. I think in all three cases, there was an acknowledgement of the progress that we are making as a company and executing on what our plan was for the last year to 18 months. And it's also clear to me that we have to continue that track record of executing our business plan.

So our focus, as we've said many times is to get to the FFO-to-debt goal of 13%, no later than 2024. And I think that's well received, as well as thereafter, getting into the mid-teens level. We also had a dialogue on the use of proceeds for the two transformative transactions that we executed on in the fourth quarter. And I think we are taking those steps needed to get to investment grade. And as we have stated before that it's very important for us, and it is a very key focus for us moving ahead.

Jon Taylor, I don't know if you have anything to add to that, perhaps.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

No, Steve. I think you said it -- I think you said it well. I thought the meetings were very productive, a lot of discussion around culture and the things that we're doing around in our code of conduct and other policies, as well as our financial plan. As you know, Julien, two of them have us on positive outlook. And I think, as long as we continue to execute, I'm optimistic that they're going to be in a position to upgrade us sometime this year. It might be later this year. But as long as we continue to execute against our plan, I'm optimistic that they'll be able to do something later this year. Now for S&P, they have us on a stable outlook. They have a little bit of a different timeline. But from the conversations that we had, I do anticipate that they could be in a position to at least have an outlook change maybe as early as the fourth quarter.

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

Excellent. Great. And just a couple more detailed ones here, if I can. I mean, on the pension, what does that currently look like, given the moves that we've seen in rates just even since 3/31? Can you quantify the potential earnings impact? And then also in the accounting change, was there any amount that was raised for the amounts you capitalized? What was that amount and what jurisdiction?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yeah. So Julien, on the pension, let me just maybe level set the group here on. Obviously, there's a lot of moving pieces, but there's been some volatility in the interest rate environment as well as the equity markets. And on the balance sheet side of things, it's been positive, right? It's moved our funded status from 82% at the end of last year to 84%, which is about a $350 million improvement in the liability, which improves credit metrics by about 20 basis points. However, for pension expense because of the planned losses versus the expected return, that's going to put some pressure on -- or at least some potential pressure on pension expense. And if you had to mark at it at the end of March, it would have been about a $0.10 per share headwind for us.

Now a couple of thoughts, I would offer up. First of all, we have eight months to go in terms of setting pension expense for next year. So it's early and we have time to recover. But more importantly, the management team is already planning is that this headwind is going to exist, and we'll be able to use the O&M benefits associated with our FE Forward program that we recently announced as offsets, as well as we're looking at other opportunities around the timing of maintenance activities.

We're looking at our debt financing plan, including voluntary pension contributions and many more opportunities. So bottom line is we wanted to be transparent and, more importantly, articulate our plan that we're working on. Obviously, this is something that we're going to continue to monitor, but we run our business conservatively and always have levers that we can pull to offset items such as this.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Julien, this is Steve. I would just also add. We have seen volatility surrounding pension performance in our past. We have demonstrated in our past that we can overcome headwinds. And also, I would add that it is our ongoing effort to be transparent about key issues like this. And it's early in the year. As Jon said, we have eight months and the team is dedicated to defeat any headwinds that we will see. So, I'm very confident in that. And once again, we'll keep you updated throughout the year as we proceed.

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

All right. And then...

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Julien, I'm sorry. You had a two-part question. Maybe you could just reiterate?

Julien Dumoulin-Smith
Analyst at Bank of America Merrill Lynch

Sorry, on the accounting changes, just what was in rate base, if you will, how is that moving around? Sorry, just a super quick clarification.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. So all the accounting changes, Julien, were prospective. So it impacts the historical rate base. So it was a prospective change. Excellent. Thank you, guys. Appreciate the patience.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you very much, Julien.

Operator

Thank you. Our next question is from Steve Fleishman with Wolfe Research. Please proceed with your question.

Steve Fleishman
Analyst at Wolfe Research

Yeah. Great. Thanks. I think you answered my question on the pension. It sounds like that's just manageable within the 6% to 8% growth rate. Is that fair?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Yes. Yes, absolutely.

Steve Fleishman
Analyst at Wolfe Research

And maybe any thoughts on -- you obviously were very successful with the transmission sell-down. Any thoughts on whether it might make sense for additional asset sales? I guess you don't really have any further equity needs except the $100 million a year thing. So I'm just curious any thoughts there.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yeah. Hey, Steve. This is Jon. So you're right. We don't have any additional equity needs in our plan. Obviously, we feel like we have the right level of growth in cash flow to get back to investment grade and fund our capital programs and a competitive dividend. Having said that, I think if you look at the track record of this management team, we're going to do what's right for shareholders. And if there was ever an opportunity or a need like that again in the future, we would absolutely look at all of our options and capitalize on the difference between public and private market valuations just like we did last year.

Steve Fleishman
Analyst at Wolfe Research

Okay. Great. And just any, I guess, further update on the shareholder settlement process? I think after kind of little noisy with that one judge, just how confident are you that that's going to get approved?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Well, Steve, you're referring to the derivative lawsuit settlement. And just for the benefit of everyone -- got it. All parties in the shareholder derivative cases agreed to a global settlement. And as you know, it's subject to court approval. On March 11, the parties submitted their papers to the Southern District of Ohio Court. And the approval process will take a little bit of time. And I just want to continue to respect that ongoing process and that's where we stand on it.

Steve Fleishman
Analyst at Wolfe Research

Okay. Great. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thanks, Steve.

Operator

Our next question is from the line of Angie Storozynski with Seaport Global. Please proceed with your question.

Angie Storozynski
Analyst at Seaport Global Securities

Thank you. I -- just following on the investigations, can you give us an update on what's going on with the SEC investigation?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Sure, Angie. Thanks for your question. The investigations are ongoing and we, as a company, continue to fully cooperate and we're ready to do that. I can't really speculate on any timing for completion right now. We're somewhat on their time table and we respect that. So, I don't want to get too far ahead of the process. And that's really where we stand with it right now.

Angie Storozynski
Analyst at Seaport Global Securities

And you haven't provisioned -- so there's no reserve or any provision for that potential settlement or fine, whatever you call it?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

No. We've noted in our 10-Q that we believe that it's probable that we'll incur a loss, but we can't reasonably estimate it at this time.

Angie Storozynski
Analyst at Seaport Global Securities

Okay. And then secondly, Jon, you mentioned that the O&M is tracking your annual plan. It's a little bit surprising to me to see maintenance outage expense for power plants during the first quarter, which is the peak usage season for power. Is it just -- it's basically that's when the outage happens and hence, the recognition of the cost?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yeah. The outage was in late February, March. So March being kind of a shoulder month, I don't feel like that's unusual at all.

Angie Storozynski
Analyst at Seaport Global Securities

Okay. And then lastly, I think that you guys mentioned that there's another grid mod capex filing in Ohio. Is that something new? Because I actually didn't expect any regulatory proceedings besides just the pending audits in Ohio this year.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

No, that's -- Angie, that's something that we've had on our radar for quite some time. We started the grid mod one program three years ago. And it was always the intention that there would be different phases of the grid mod program. And so that's something that we'll file probably later this year or we will file later this year. We've already kind of had some discussions with some of the intervening parties around the plan and some of the thoughts. But it will be kind of a continuation of our grid mod one program, smart meters, distribution automation, voltage regulation. We might do some pilot workaround, trip savers and utility on storage, battery on storage, those types of programs. But this has always been in the plan.

Angie Storozynski
Analyst at Seaport Global Securities

Okay. And then last one. Where do you expect to be on the FFO-to-debt by the end of this year?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

So from an S&P perspective, we'll be over 11%. And from a Moody's perspective, we'll be somewhere between 10.5%, 11%. So, that's kind of where we're targeting. A lot of it is going to depend on what we do with the final $800 million of the proceeds, whether we fund the pension or take out additional holding company debt. So, those numbers could change quite a bit, but that's our current thinking.

Angie Storozynski
Analyst at Seaport Global Securities

Great. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thanks, Angie.

Operator

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Michael Lapides
Analyst at The Goldman Sachs Group

Hey, everybody. Thank you for taking my question. Just curious, can you remind us, ex the accounting changes, what was embedded in 2022 guidance for O&M growth or O&M savings, right, year-over-year?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yeah. So Michael, if you adjust last year's O&M for the accounting changes, just our base level operating cost, we're going to be at $1.4 billion this year. Last year, we were a little bit north of that number. So as you start to think through the rest of this year, especially in the second half of this year, you will start to see some O&M reductions relative to the prior year based on our FE Forward program.

And then that will continue into the following year. So, we're super excited about it and its meaningful reductions. And you'll start to see that in the second half of this year. And that's going to give us some flexibility to do some things strategically, where if we want to put some additional O&M in certain jurisdictions or do some other things, it just gives us a lot of flexibility when you have that type of program.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. And when I -- go ahead. Sorry.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Sorry, Michael. This is Steve. I was just going to add, even while you're going to see that impact on O&M, which will be a lowering impact, we're keeping our customers at the center of the equation here also. And that is even as we lower O&M, by the reinvestment in certain ways in our various computer systems, the ability to streamline service to customers, the customer experience will be enhanced all at the same time. So, I just wanted to add that. Sorry, I stepped down you there.

Michael Lapides
Analyst at The Goldman Sachs Group

All good. Just one follow-up there. When I think about the long term, did the long-term, kind of whatever O&M assumption is embedded in guidance, does that include the benefit you may realize from the utility consolidations in Ohio and Pennsylvania?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Well -- so Michael, so the benefit associated with the consolidation of Pennsylvania and Ohio, that's not necessarily an O&M benefit. There might be some administrative things that are streamlined. But in the main, it's not an O&M benefit. Because as Steve mentioned, we've already gone to a five-state operating model operationally, right? And so we're already operating like that. And that's where some of the benefits on the O&M side is the streamlining of the operations into that five-state operating model. The benefits associated with consolidating some of the legal entities is on the financing side, right? I mean, right now, those companies, smaller companies, they're accessing the private debt markets and they're a little bit more expensive than if you were to access the public markets.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. Okay. And then finally, just coming to one of the regulatory items, the light vehicle charging program in New Jersey that you're kind of trying to reach settlement for, can you remind us what's the capital required in that?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

So, I think we're going to be -- it's going to be south of $100 million. I think it's going to be probably somewhere around $50 million that will be rate based. But yeah, we're working the settlement. And hopefully, we'll have some clarity around that soon.

Michael Lapides
Analyst at The Goldman Sachs Group

Got it. Thank you, Jon, and thanks, Steve. Much appreciated, guys.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you, Michael.

Operator

Our next question is from the line of Srinjoy Banerjee with Barclays. Please proceed with your question.

Srinjoy Banerjee
Analyst at Barclays

Hi. Good morning, guys. Thanks for taking the question. Maybe a couple of ones. So you mentioned OpCo recapitalization. Could you remind us which opcos you would specifically target and just how much of the proceeds from the disposal you would allocate there?

And then secondly, around the $800 million that could be used for pension contribution or holdco debt, are you leaning towards one or the other right now? Would Moody's prefer you to get it more towards holdco debt reduction? And could that accelerate the upgrade to investment grade? Thanks.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

Yes. So when it comes to the equity contributions into the operating companies, that's primarily going to be in our Pennsylvania companies, in Mon Power, in West Virginia, maybe a little bit in Ohio, but primarily Pennsylvania, West Virginia and then like I said, just a little bit in Ohio. So, that's kind of what we're targeting right now. A lot of those cap structures over the years have moved down to the mid-40s. We're going to get those back up to 50%. So, we feel good about that plan.

When it comes to the $800 million, obviously, a lot of it depends on the interest rate environment, where the funded status of the pension plan is, incremental capital opportunities. Our focus is on improving the balance sheet, enhancing our credit metrics, but also to make sure anything we do is accretive to earnings. The conversations that we have with Moody's specifically, I didn't get the sense that they -- pension contribution versus holdco debt takeout, I don't think they -- it counts as adjusted debt to them anyway, both. And so I didn't think they had a view one way or the other. But we're obviously, as we kind of make these decisions, we'll run things behind them.

Srinjoy Banerjee
Analyst at Barclays

Thank you very much. And just one very quick follow-up. When you have the conversations with the agencies, did you get a sense that they were looking for anything else outside of the sale of the FET minority stake, so sort of conclusion of any of the investigations like the SEC one? Just curious there.

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

No, I didn't get that sense. I mean, like I said, I think for us, it's just a matter of executing our plan and deploying the proceeds from the Brookfield transaction. And I think they're very, very pleased with the changes that we've made. They're very interested in our cultural changes and the things that we're doing around our compliance program and stuff like that. So, I didn't get the sense from them that there was anything else that they were looking for. But I don't want to speak for them. I just don't recall that in the conversations being a big issue.

Srinjoy Banerjee
Analyst at Barclays

Got it. Thank you very much.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you.

Operator

Our next question comes from the line of Paul Fremont with Mizuho. Please proceed with your question.

Paul Fremont
Analyst at Mizuho Securities

Thanks. Does the debt paydown at the holdco and the potential recapitalization of utilities in any way change your equity guidance for the next five years? And if not, should we just expect that capital spending will ultimately be funded all with debt?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

So Paul, let me maybe address your question there. I mean, if you think about our $17 billion capital program and the equity proceeds that we have coming in, plus the cash from operations that we'll generate over the five-year period, we're only going to fund our capital program with 30% debt, $5 billion. In the meantime, we're going to take out $1.5 billion. So over the forecast period, our balance sheet debt is only going to grow by $3.5 billion even though we're going to invest $17 billion.

Paul Fremont
Analyst at Mizuho Securities

And does that include expected funding, additional funding at the holding company?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

So we won't -- I mean, so the plan right now is the holding company debt. After we take out the $500 million this year, we'll be at $6.5 billion. So, we will not have any more holding company debt. In fact, if we make a decision that we're going to take out more holding company debt, it will be less than that.

Paul Fremont
Analyst at Mizuho Securities

Okay. And then I guess you're talking about possible pension funding. Have you determined on a target number for pension funding this year?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

It would be voluntary. It's a voluntary contribution. So, there's no required...

Paul Fremont
Analyst at Mizuho Securities

It's been like around $500 million. Is that sort of a reasonable assumption that, that would continue?

K. Jon Taylor
Senior Vice President, Chief Financial Officer and Strategy at FirstEnergy

So the remaining proceeds, Paul, is $800 million from the two transactions. And if we decide to make a pension contribution, that's totally up to us. So it could be the full $800 million. It could be, we decided to go a different route and maybe take out additional holding company debt. Maybe we fund the pension $300 million or $400 million. There's a lot to be worked out. And so I can't give you a good answer. But it's a voluntary contribution, not a mandatory or required contribution.

Paul Fremont
Analyst at Mizuho Securities

Rightly said that [Phonetic]. Thank you very much.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Thank you, Paul.

Operator

Our next question is from the line of Gregg Orrill with UBS. Please proceed with your question.

Gregg Orrill
Analyst at UBS Group

Yes. Thank you. I was wondering how you're thinking about the 50 basis point RTO adder. And I know you've disclosed sort of your sensitivities to that. But in sort of the downside scenario, how does that affect your thoughts around earnings guidance?

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

I don't think it's going to have a material impact on earnings guidance, Gregg. I think we've been fairly clear that the -- on the sensitivity that we do have for it, it will not materially throw us off track in terms of achieving our goals. We also continue to believe that the adder is appropriate and it's helpful for us as we continue to build out and improve transmission reliability for our system and our five-state footprint. And that's where we stand on it.

Gregg Orrill
Analyst at UBS Group

Got it. Thank you.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Sure. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor over to Mr. Strah for closing remarks.

Steven E. Strah
President and Chief Executive Officer at FirstEnergy

Well, thank you very much. And thanks for your ongoing support and attention today.

I did want to just take a brief moment and wish everyone a very Happy Earth Day, which is today actually. At FirstEnergy, we're really proud of our commitment to the environment. This week, we stated a goal in which we're going to plant 20,000 trees throughout our service territory. It's just one of a number of different initiatives organized by our green teams, which are employee volunteers who support environmental initiatives in a full range of items from planting trees to beach cleanups to recycling. And I'm just very, very proud of our employees that are engaged in such an important activity for us, and I just wanted to acknowledge and thank them for that today.

And with that, I'll call a close to the call. Thank you for your continued attention and support. And we'll be talking to you soon. Thank you.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Irene Prezelj
    Vice President, Investor Relations
  • Steven E. Strah
    President and Chief Executive Officer
  • K. Jon Taylor
    Senior Vice President, Chief Financial Officer and Strategy
Analysts

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